How to show interest on NSC in Income Tax Return?

One of the best ways to save income tax u/s 80C is investing in National Saving Certificates. NSC can be purchased from the post office, which has 5 years tenure. While you can claim this amount from 80C exemption, interest from NSC is taxable. It needs to be shown as taxable income while filing income tax return. However, there is a lot of confusion about how to show NSC interest in income tax return. In this article, I would provide you the ways on how you can show Interest on NSC in ITR.

What are National Saving Certificates?

If you are already aware of complete features, skip this section. One can invest in NSC, which can be purchased from the post office and these can be claimed as deduction u/s 80C up to Rs 1.5 Lakhs. The National Saving Certificates are available in the denominations of Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000 and Rs. 10,000. The investor can purchase any number of certificates of any denomination. It is used as a big tool used by income tax assesses to reduce their tax burden. It is important to note that Hindu Undivided Family (HUF) and trusts are not allowed to invest in this scheme.

The interest rates provided by the NSC are at par with the other fixed interest earning instruments like Public Provident Fund. Interest rate for Apr-16 to Jun-16 is 8.1%. It provides higher interest rates compared to post office FD or bank FD’s. NSC has 5 year lock-in period. You cannot withdraw the amount before that maturity period. This is the reason its interest rate is higher than the savings account.

How interest is calculated in NSC?

The interest accrues on the yearly basis, but deemed to be reinvested. At the end of the maturity period, the interest so received from the NSC is liable for the payment of tax according to the tax slab of the individual. However, most of the assessee is often mistaken by not showing the interest earned on the NSC in their annual income tax return. The annual interest earned on the NSC has to be shown on your income tax return.

How tax planning can be done through NSC and how to show it income tax return?

The principal amount invested in the NSC is deductible under Sec. 80C together with other tools like insurance premiums, PPF contributions, tuition, fees, housing loan principal amount repayment, etc. but the limit is Rs 1.5 lakh. So, if you desire to invest some fresh money in NSC, do take into consideration other tax saving investments.

Take an illustration (1) – if an employee has a basic pay of Rs. 36,000 per month, 12% of it, i.e. 4000 is contributed towards EPF. The annual figure comes to 48,000. The employer will also be paying 48,000 towards his EPF. So, his total becomes 96,000. That year, he makes a fresh investment of 70,000 in NSC. But, he can avail the exemption till 54,000 only as he has hit the upper limit of Rs 1.5 Lakhs and an eligible exemption of Rs. 16,000 could not be availed under Sec. 80C.

Illustration (2) – you invest Rs. 20,000 in Feb. 2014 for FY 2013-14. You have Rs. 50,000 has EPF deduction and paid 10,000 as LIC premium, so you can claim the deduction of 80,000 under Sec. 80C. If you can invest Rs 70,000 in NSC, you can claim the full amount of Rs 1.5 Lakhs u/s 80C. This amount can be shown in the income tax return ITR-1 in part C – Deductions and Taxable Total Income.

How Interest on NSC is calculated?

The interest on NSC is calculated annually on a compounded basis. It means that you have to calculate interest not only on the principal but also on the interest received so far. So, the interest is to be calculated for the first period, add it to the total and then calculate the interest for the next period.

Let me explain with an example. If you invest Rs 1,0000 in NSC, your interest is Rs 810 (10000 x 8.1%). However, your principal amount for a second year is Rs 10,810 (Rs 10,000 + 810). Interest of 8.1% is computed on Rs 10,810 which is Rs 876. See the illustration table below for the entire 5 years for interest rate of 8.1%.

How to show NSC Interest in Income Tax Return?

Interest earned from NSC is taxable in the hands of the assesse though tax is not deducted at source.

There are three ways to show the interest earned from NSC.

Method 1 – you show the interest earned under the category of Income from Other Sources as well as Deduction on NSC under Sec 80C every year. See the below illustration on how it works.

Method 2 – You claim deductions for interest earned on NSC in the year for deduction, but, you don’t show it as income. In this case, the entire interest income will be counted as income in the last year.

Method 3 – you don’t claim the interest earned in for the deduction and you don’t mention it as income. In this case, the entire interest amount will be counted as an Income from Other Sources in the last year, but only first four years will be counted as a deduction.

It is important to note that one should stick to a single method during the entire tenure of his investing in NSC. One should not change the method of showing the interest in income tax returns and claiming exemptions.

Method 1 is the best way to show the NSC interest as it distributes the income all through the years and the tax liability does not accumulate for the last year.

Conclusion: National Saving Certificates have been used as an important tool by the assessee to reduce their taxable income. But, there are few points attached to it. One should keep those points in mind to avail the maximum reduction.

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Hi Sir..
In the First Method, the interest earned for the 5th Year Rs 1106 is shwon u/s 80c. But where as for the fifth year, the interest would not be invested since it is going to be withdrawn.. Then how can we show it in 80/c as it is not invested. For the first 4 years it is ok, but for fifth year, the interest earned should not be shown as reinvested and hence it should not be claimed u/s 80c. Similarly in the second method also..

And next… in the third method, the interest earned for first four years has been claimed u/s 80c. But as of my knowledge, it should not be like that. Only the fourth year interest can be claimed u/s 80c, because previous years investments cannot be claimed u/s 80c in this current year..

Thanks for your article. I am a pensioner. I have bought NSCs on 19.1.15 for Rs 110,000 and it is going to be matured on 19.1.2020. Will I be showing it the interest accrued for the 4th year?
2. May I get the table for NSCs purchased during the year 2015-16, 2016-17, 2017-18?
3. Interest accrued will be shown for 4 years or all the 5 years?

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